Tax Identity Theft: Prevention and Detection

Concerned about tax identity theft issues this filing season? Get an update on the current processes for preventing, detecting, and resolving tax identity theft cases for your clients.

PREVENTION AND DETECTION

The IRS uses various fraud-prevention measures and filters to stop the vast majority of invalid refunds. From 2011 through 2014, the IRS detected 19 million suspicious returns, prevented more than $63 billion in fraudulent refunds, and significantly reduced the time required to resolve an identity theft case.

In addition, the IRS substantially increased the number of filters they use to detect identity theft. Filters were first used to detect fraudulent returns in 2012. The use of filters has steadily grown over the past several years. From 2012 to 2013, the number of filters used increased from 11 to 80. In 2014 and 2015, the number of filters grew to 114 and 196, respectively. During 2014, the IRS rejected 338,807 e-filed returns and 15,915 paper-filed returns in an effort to prevent issuing fraudulent refunds.

By late 2012, the IRS had more than 3,000 employees working on identity theft cases, which is more than twice the number of employees dedicated to this purpose in 2011. In addition, more than 35,000 employees who work with taxpayers were trained to recognize signs of identity theft and provide assistance to victims.

There are signs that may alert a taxpayer that they are a victim of identity theft. These include the following.

The taxpayer discovers that more than one tax return for them was filed with the IRS.

The taxpayer discovers there is a balance due, refund offset, or collection action taken against them for a year for which they did not file a tax return.

IRS records indicate the taxpayer received more wages than actually received.

The taxpayer’s state or federal benefits were reduced or canceled because the agency received information about an income change.

RESOLVING TAX IDENTITY THEFT

Tax returns must continue to be timely filed even during the period when the IRS is resolving an identity theft case for the taxpayer. Any return that was the subject of identity theft must be filed in paper form. Preparers should attach the following items to these paper-filed returns.

A copy of the e-file rejection notice (typically provided by the preparer’s software)

Form 8948, Preparer Explanation for Not Filing Electronically, indicating why the return is not being e-filed (The e-file rejection code should be noted, along with an explanation that the taxpayer is a possible identity theft victim.)

Form 14039, Identity Theft Affidavit

A copy of any IRS correspondence received by the taxpayer regarding possible identity theft issues

Any erroneous refund checks the taxpayer received

The paper return should be mailed to the address for paper-filed returns for the taxpayer’s geographic area.

If a payment is due, it should be included with the return unless the taxpayer is unable to pay and requests an installment payment plan. If an installment payment plan is requested, Form 9465, Installment Agreement Request, should also be attached to the return.